Zimmer Biomet Holdings, Inc. (ZBH) Earnings Call Transcript & Summary

Okay. Thank you, everybody. We're ready to start the next fireside chat here, the Bank of America Virtual Vegas Conference. Next up, from a medical technology perspective, is Zimmer Biomet. We're thrilled to have the senior management team from Zimmer Biomet on the line. I think everyone knows the players. We have Bryan, Suky and Keri with us today. And this will be pretty much entirely fireside chat. So to the Zimmer Biomet management team, thank you very much for being here, and we appreciate your time because I know it's a very busy time for everybody.

So Bryan, if okay, I'll kick off with a question for you, just kind of following up from the first quarter call. One of the main questions I was getting after you guys printed is just kind of people trying to interpret and understand your results for the first quarter and through April relative to what they're hearing from some of the other orthopedic companies. So if you wouldn't mind, as a place to start, maybe just give us kind of your views on, say, your largest business, knee, what was kind of going on pre-COVID and then through COVID as a place to start. And again, thanks for being here. Much appreciated.

Yes. Thanks, Bob, and thanks for having us. And I know that everyone's pivoting to try to be able to provide business as usual to the extent that we can. So I know this has been challenging for you to do this, with all the technology glitches, but let's hope it goes well now. What I'd tell you is we've been getting the same questions, obviously. And I would probably frame it this way. When I think about either Q1 or April, I certainly speak to why the numbers look so different when comparing us versus another company, another competitor. And I would probably caution anyone from trying to read too much into these differences because there are clearly differences. But the variables that COVID has impacted are just so significant, and the impact of those variables on the performance is also significant. So just remember, when I think about it, I think about it this way, just broadly speaking, and then I'll speak to what I do is that this idea of COVID impacting different variables has changed relative to the depth of impact, the timing of that impact and the recovery of it when you think about things like setting differences. I may have business in different settings than, say, my competitors do. Just an example, a typical general hospital might have more COVID patients, and as a result of that, have a different impact because of COVID than a dedicated specialty hospital. And both of those would have a different impact versus an ASC setting. If I think about geographic differences, my share position in a country, a state, even by hospital could be different. And each of those things could be impacted differently from a depth perspective and timing of COVID. Mix of business, by product category, it's early, but we're definitely seeing differences in the way trauma, spine, CMFT and dental have been impacted. So mix of a business could also drive some very different views of what performance look like in a specific time frame, first quarter or April. In addition to that, typical comp differences would matter year-over-year and, in particular, when we're talking about comps inside of a quarter, in a specific month. And then you've got day rate differences, obviously, that are compounded by the fact that if you had more or less days in a time frame when COVID was more impactful, that could make a significant difference. So again, I just -- the point is the complexity of trying to draw conclusion in the time frame that we're dealing with right now is nearly impossible. So what I'm trying to stick to is you know what I know, and your question kind of leads me to that. What I know is 2 major things. I know what my performance was in the Americas during Q1 before COVID. And I'm very confident that in the chaos following the impact of COVID, we didn't see share changing. When that kind of chaos is occurring, people are scared. People are just trying to hang on to whatever they can. You're not seeing individuals or surgeons go out and say, I'm going to change my implant right now. And so if I go back to the first one, the thing that I know is that our performance in Q1 was very strong pre-COVID. We are positioned to be able to have an earnings call that we were all very excited about. I'll give the specifics. Just don't expect this on a go-forward basis, though. But if I think about where our base knee business is, now when I say base knee, that means everything, excluding ROSA, that would be in that knee category, we're in the mid-single-digit growth rate when we're talking about the quarter pre-COVID. So we were on fire as an organization, and I could speak to why that is, but we were on fire. So when I just look at that and I look at this idea that very little share churn was occurring during the chaos of the COVID implementation, it tells me that we weren't ceding share. And if we were, great. That would mean that the [ market ] was literally on fire in the first quarter. But that's just my view. I think it's hard to draw any conclusions given different business performance because of those variables. And if I just stick to the facts, I know we were knocking that out of the park.

So that's very helpful. So just to be clear then, so in the first quarter pre-COVID, is that your kind of global knee business ex ROSA that was growing mid-single digits? Or was that an Americas comment? I just want to be clear on the data there.

Yes, that was specifically Americas. But I would tell you that our growth rate outside of the Americas was very good, too. And so the Americas is what everybody is focused on right now, obviously. But that is -- it was very strong. And a number of reasons why that was, but I was as excited as I could be. It would have been the best growth rate we've had in base knees ever at Zimmer Biomet. And that's coming off a really strong fourth quarter, too.

Yes. I mean that would be a -- have been a clear acceleration. And again, that excludes ROSA, just to be clear.

Yes. It would have been better with ROSA. But just know that in the quarter, ROSA wouldn't have been a big impact because of COVID-19 timing. A lot of the ROSA sales, just from a capital perspective, typically come at the end of the quarter and, as a result of the timing of the impact of COVID, it retarded our ability to get those deals done.

Okay. And so you mentioned you had a few thoughts on -- were there specific thoughts on why you think you had that momentum specifically in the first quarter? Because that -- those growth rates would have been clearly an acceleration over where you've been. So what was driving that in your mind?

Yes. I mean, it's a handful of things that I would say. First and foremost, there's just a -- we got our mojo back in the sales organization. We've got the swagger in the sales organization that is palpable. There's no question. People are on offense. They're fired up. So that's a big part of it. I don't want to diminish that at all. Another one is we changed the compensation scheme coming into this year to overemphasize compensation linked to growth. And so that obviously puts a fire under anybody's shoes to ensure that they're focused on growth. And I would just say supply concerns are gone. People aren't worried about supply anymore. Our new products is another big one, and I would say particularly around the Persona family and, in particular, inside of the Persona family a revision was absolutely on fire even with a limited amount of sets. And I would just say, again, I don't want to diminish this, the operating mechanisms that we have in place to drive discipline and accountability are as good as I've ever seen. And that is different than what we had a year ago even.

Okay. Yes. A couple of quick follow-ups, and I appreciate the helpful details here. And I do kind of just conceptually agree with your point. It seems like in the middle of a crisis, the odds of doctors shifting alliances seems remote. But -- and I realize there are definitely differences in terms of all the things that you've mentioned. It sounds like you had great momentum in knees heading into COVID. Maybe just -- was that the same? Were you seeing that across your portfolios? I can -- I don't expect you to give us specific numbers in every single line item, but just curious, were you seeing the same sort of momentum in hips and some of your other businesses as well?

Yes. I would say, generally, I was very pleased with the quarter progress and frustrated that I could never present that -- the quarter that we thought we were going to have. I would say knees was outsized versus other categories. If I think about hips, it was looking good, but not as strong as knees. And our overall set business was in line with what I would have expected to happen in Q1. But knees was just above our expectations. It was on fire.

Okay. That's helpful. And I just wanted to ask kind of your thoughts on ROSA in the current environment. Do you think that, generally speaking, there'll be fewer robotic procedures done as doctors are kind of looking to get back on track because there is a learning curve associated with robotics, and in some cases, it does take a little more time? So do you think it will be a little bit less utilization of robotics in the short term? And then I would assume that over the course of the next year, during this time of uncertainty, that the majority of placements might be more kind of leasing or usage-based models. Are those fair assumptions on my part, you think? Or do you see it differently?

Well, first of all, I'd say that the ROSA [ attributes ] actually lend themselves really nicely to the current COVID environment because I think you're right. I think in a time where the funnel is going to be full of patients, timing of when that's going to be is hard to say, but it's going to be full. And surgeons are going to want to be able to get throughput now more than ever and likely not want to change too much. And that's the beautiful thing about ROSA. We can come in with ROSA. They're already using our implant. The ROSA system allows for that time neutrality and a procedure, and it also does not significantly impact the typical surgical flow. So the things that would change for a surgeon using robotics are minimized, but the accuracy they get with ROSA goes up. So I actually think we're positioned pretty well given some of the challenges that typically you would think robotics might have during this time. Relative to placement strategy, here's the thing, we're going to flex based on the needs of our customers. What we know for sure is that the demand has not diminished. The funnel associated with surgeons coming in to get trained on robotics is still robust. And so my feeling is that, that demand will be there, but there may be some short-term needs for us to be more flexible in our placement strategy. I don't want to get into specifics, but remember, for us, anyway, when I think about robotics, that short-term capital pop is not the thing I'm most interested in. What I'm most interested in is being able to provide better patient care, obviously, because ROSA provides that accuracy. But really importantly, it's more around that annuity revenue associated with ROSA placements. So I'm not going to let short-term capital constraints get in the way of placing ROSA systems because that annuity stream is really what we're focused on.

Yes. That makes sense. And one other thing I'd love to get your view on is just kind of pace of recovery question. Two quick things. One, which of your businesses do you think come back sooner? Which lag a little bit? And then relating to that, we've definitely heard some anecdotes from other companies and from the field about this potential concept of patients potentially being worried about the second wave in the winter/fall time frame. They were very willing to get procedures done in kind of the near term. So yes, if you wouldn't mind commenting on just kind of which of your businesses you think might get better sooner than others and this concept of patients' willingness to get things done soon.

Yes. Obviously -- early days, obviously, Bob. But it's needless to say, we're monitoring this really closely. And we've got more outreach right now and more connections with our customers than ever before, and that's on a global basis. And we are seeing early, but we are seeing some differences. Logical extension would say that trauma should come back first. As people get back out, people are obviously going to have trauma issues again, and they'll come back in the funnel and the reason why I think that beyond just the obvious, as people begin to move, there'll be accidents. So you're not going to have the concerns about a patient's psychological position on whether they should go in to get a procedure. You're not going to have a concern around capacity. You're not going to have a concern around, do I have PPE or a test kit. Somebody comes in and they're hurt, you're going to take care of them. And so my sense is trauma will obviously be the first to recover for those reasons. What we've also seen is spine and CMFT seem to be ahead of recon. Again, just looking at the data that we have right now, it's early, but we're definitely seeing spine and CMFT coming back quicker. Recon is then after that. When you look at our businesses, then dental seems to be clean up behind recon for likely obvious reasons. So that's just, again, we're going to get smarter on this as we get more data and more time behind us, but that's our early read on the likely timing of these things coming back and cadence has been coming back. When you think about this idea of patients trying to somehow get in front of the next wave, it's an interesting question because I think it's just one of many variables that will dictate when people actually come back in the funnel. As I said on my earnings call, I have a high level of confidence they're going to come back in the large majority of the patients. But trying to predict when is going to be challenging. One of the reasons is what you just said. Are we going to get a false positive because patients are rushing back in to be ahead of the first wave? Will we have constraints because of just operating room capacity? Will we have constraints because of PPE or test kits? Will we have constraints because patients are afraid right now, and they're going to wait till later? So if I just look at all those variables, that's why I'm saying it's almost impossible based on the moving pieces and parts to know when we get back to a normal. There's just too many, again, variables that have a high degree of variation per variable to predict that. I do believe we will. It's just a question of timing.

Yes. That's a great segue to kind of my next question because a lot of the medical device companies are putting forth this notion that while there's a lot of uncertainties, base case for a lot of these medtech companies as they kind of talk to The Street is that Q4 could approach normal levels. And of course, sell-side analysts doing what they do, they listen to management teams and, therefore, consensus expectations are now that Q4 broadly across medtech is at least as good as the year ago period and, in a lot of cases, some growth. Now I thought your comments were more balanced than that. But consensus expectations for Zimmer Biomet is now close to flat growth year-over-year. Given all those uncertainties that are out there that you just went through, is it -- do you think it's a reasonable base case that it's kind of flat year-over-year? Or does that seem too aggressive to you?

I don't want to speak specifically to what I think the fourth quarter will do for us. But what I would say is this. You could see -- before we get back to a normal, you could see volumes look normal or potentially even better than normal. But there's flaws in that because the way I look in an way that we're actually going out and testing and getting data is to go to a hospital, and the best way to look at it as a microcosm, go to a hospital that's open for business, and we're doing this around the globe, and say to that hospital, what's your typical patient volume in your account? Okay. Now next question. How many of those procedures are you getting now? How close are you to typical? And then subcategories to that would be how many of those patients are deferred patients coming back into the funnel or new patients, right, the new patients you would typically have. And we've got to get to the point where the new patients make up the volume they would typically have, and the deferred patients are just above and beyond. So you may have the deferred patients make it feel like, because they're coming back in the funnel, that things are back to normal. But to me, the normal isn't until you get the new patient population coming in and fulfilling those procedures that they would typically see. So that's why I think it's a challenge to get a sense for when exactly it's going to happen. It doesn't mean that we couldn't see very exciting volumes early. That doesn't necessarily mean we're back to normal.

That's a great way of framing it. I appreciate you articulating it that way. That makes a lot of sense. And we'll look forward as you gather some of those data points and aggregate them up. I think that will be really important. Bryan, one longer-term oriented question, and then I wanted to ask Suky a question on cost structure. We're trying to ask all the CEOs this question. As we think about life on the other side of COVID, are there 1 or 2 things that come to mind where you're like, these are things that are definitely going to be different on the other side? And maybe they won't be much different, but are there 1 or 2 things that strike you as things that we should be thinking about in terms of the medical device ecosystem, specifically in orthopedics, that just could be different and changing as a result of COVID?

I mean, for me, the benign things would be, do we think about work-from-home strategies differently. After seeing it, what I think what we've all found is you can work from home pretty effectively. And so those kinds of things we're going to look at and we're going to think about, do we act a little differently as a result of that? And those could have by-product effects to be able to cut cost too, by the way. But outside of that, if I just think about the way we conduct business, the way we focus on the ecosystem, as you described it, I'm already seeing -- we're seeing an acceptance of technologies that were there all the time that we had anyway, that hadn't been getting as much attention like mymobility, being able to do things with patients, keeping that connection with them, but not actually having the -- connected with them in the real world is a big benefit now. People are really paying attention to this. And so when we think about our ecosystem and the differentiation of it, we do believe some of these virtual platforms that we have like mymobility will be game-changers going forward, and we're absolutely going to try to take advantage of that. We're also looking at technologies that would allow us to be more virtual in other ways. And so I do think that you're going to find that you'll see more of that and more acceptance of that in the future. I don't necessarily think it will be a sea change, but I do think it will be a different focus from our customers, not just us.

Okay. I know it's pretty dynamic, and we may learn more as time goes on, but I appreciate those thoughts. On the cost side, and we talked about this a little bit on the call, and I appreciate the color that you were able to give on the call. But I wanted to kind of just go maybe into a little bit more detail and think about on the other side of COVID and specifically 2021, and this is -- it's not a guidance question, but I think the question that I get from investors is if you just kind of think about it simply and if we're, say, hypothetically able to get back to 2019 levels in 2021, does that mean that, roughly speaking, the margin profile of the company would be similar to what you saw in 2019? Or are there some residual factors that we need to consider that might impact margins on a lag basis into 2021 even if revenue growth is kind of similar to previous periods? So I'd just love to kind of go into that in a little bit more detail, if you don't mind, as a question because it's one I get all the time.

Yes. Sure, Bob. I would say revenue in '21 is equal to '19, and you assume the mix is the same within that revenue. I'd be disappointed if we didn't get to 2019 margins in that backdrop. There are a number of things at play and a number of variables and uncertainties that could potentially change that up or down. But again, our aspirations, we'd be at '19 margins or better. Some of the headwinds that you have going into 2021 would be any costs that were deferred this year, critical investments that we felt that we'd need to ramp back up on. And if some of those sort of bled into 2021, that could be a potential headwind. Also, there are some fixed costs in manufacturing that could potentially get deferred in inventory and bleed out to the P&L as that inventory turns. But having said that, we've also got some really strong tailwinds. We came into this year talking about margins from a guidance perspective in '20 being flat to 2019 despite overall gross margin headwinds. That was because of that restructuring program that we announced. Now we've slowed down some elements of that as part of dealing with overall COVID, but we would expect to get back on track pretty quickly as revenue ramped up. And I would expect that to be a pretty nice tailwind as we move into 2021. So -- okay. Just to come back to your very simple question, would margins resemble '19 if revenue resembled '19, I would say yes.

Okay. That's helpful. And then one follow-up to that. It kind of relates to some of the things that Bryan and I were just talking about in terms of how the world might change on the other side of this. When you think about the SG&A expense and specifically selling expense, I realize that the sales force is, obviously, a critical component of the orthopedic world and of Zimmer Biomet. But as we think about life on the other side of COVID and we think about the potential proliferation of robotics and reduction of sets, are there real opportunities over the course of the next year or 2 to reduce SG&A expense, to reduce set expense, kind of either because of things you're learning with COVID or just because of other structural changes that are going on within orthopedics?

Yes. I'd just make a comment and, Suky, if you have anything, feel free to jump in afterwards. But I would just say that this idea, the notion that even with robotics or COVID impacts or other things that would come into play, that we'd be able to reduce the presence of sales reps out in the field is challenged. The most significant reason for that is what we're seeing right now. Even though a lot of reps are not allowed to come back in the operating room, our reps are. And that's because they actually do serve a function during the procedure. And what we know for sure is that if our reps aren't there, the hospital would absolutely have to hire folks to do what they do with the competency that our reps have. So I think that would be a -- it would be a real challenge to assume that anything that's happening now would augment in any material way the need of a rep in the procedure. Now when you talk about sets, I think we do have an opportunity, maybe not specifically around sets, but maybe just the usage or consumption of inventory. We're continuing to move down this path of efficient care that I referenced before where you do the presurgical planning, you have a better sense for what you're going to need and use during the procedure. And the by-product effect of that is a more efficient procedure, number one, obviously, but it's also a reduction in inventory usage as a result of that knowledge coming into the procedure. So I think that could -- that was already there, and that will certainly be something we continue to focus on. But I don't necessarily see, again, any significant change in SG&A as a result of the COVID impact.

Okay. That's great. Unfortunately, that's all we have time for today. So again, I really appreciate your willingness to participate in this virtual experiment here and, hopefully, look forward to seeing you live next year. But again, just my sincere thanks for participating. And that ends the Zimmer Biomet fireside chat. Thank you very much.

Thanks, Bob. Appreciate it.

Thanks, Bob.

Okay. Thanks, everybody. Yes.